Editorial - Sales tax increase would put more burden on lower earners

Published: Saturday, January 26, 2013 at 11:47 p.m.

Last Modified: Saturday, January 26, 2013 at 11:47 p.m.

The idea of eliminating income tax and replacing it with a sales tax might sound appealing, but the Honorables should tread carefully before considering such a drastic overhaul.

Even state Budget Director Art Pope, whose fortune helped propel the small-government, cut-taxes contingent to power, thinks it's the wrong approach – although people at the Civitas Institute, which gets the majority of its money from his foundation, co-authored a study that is in line with a tax agenda backed by Senate President Pro Tem Phil Berger, R-Rockingham.

Pope insists that while the tax structure needs changing, a more balanced plan is needed. He even used the term "regressive" to describe the idea, and he's right. However, his boss, Gov. Pat McCrory, has indicated he may be more willing than Pope to go along with the idea.

Sales tax is paid on products or services bought and sold, without regard to how much someone makes. As a rule, those taxes take up a larger share of the income of low-wage earners than of those who are paid more.

The plan in question would replace the personal income, corporate and franchise taxes with a sales tax around 8 percent, a relatively modest increase in the tax rate that is now 6.75 percent in most counties. Together, the income taxes bring in about $12 billion annually – about 60 percent of the current state budget. But there's a catch: What is taxed also would be expanded to include a wide range of services that are currently not subject to sales tax – tree cutting and haircutting, heat pump repair and auto repair.

The result of the proposal would be to shift the tax burden more toward the bottom of the income bracket. An analysis by the liberal Budget & Tax Center projected that the wealthiest 20 percent of North Carolinians would get a hefty tax break while low- and middle-income residents would pay more.

And the increase would still leave a multibillion-dollar revenue hole. A proposed business license fee would narrow the gap, but it stands to reason, given the current political climate in Raleigh, that the proposal also could require dramatic cuts in state services including education and Medicaid.

A number of states, including Florida and Texas, have eliminated their state income tax. But in many cases that revenue is replaced with user fees or local taxes. That would be part of the strategy here. In addition to a higher and more broadly applied sales taxes, another idea being floated is a real estate transfer tax, which has strong opposition from the real estate industry and many homeowners. Exemptions that now help poorer residents reduce their tax burden also may disappear.

The Honorables may be able to make a case for lowering the income or corporate taxes, which are high compared to other Southeastern states, and raising the sales tax or applying it to services.

But if the General Assembly approves a complete overhaul – and a Washington Post article on Friday notes that this strategy is being played out in state legislatures across the country – then it must provide a reasonable tax break for low-income families and the elderly or disabled poor.

There are many possibilities for tax reform in North Carolina; this plan is but one of them, and should be considered a starting point. Whatever the final plan looks like, it should not be rushed. The Honorables have an obligation to consider the impact on residents, on job creation and on necessary state services. The plans must be discussed honestly, in open session, and public hearings across the state that include opponents as well as supporters should be part of the process – no midnight surprises or "Trust us, we'll fix that later."

Only after careful, critical analysis and a lot of debate should any major reforms take place. Anything less would violate the public trust.

<p>The idea of eliminating income tax and replacing it with a sales tax might sound appealing, but the Honorables should tread carefully before considering such a drastic overhaul.</p><p>Even state Budget Director Art Pope, whose fortune helped propel the small-government, cut-taxes contingent to power, thinks it's the wrong approach – although people at the Civitas Institute, which gets the majority of its money from his foundation, co-authored a study that is in line with a tax agenda backed by Senate President Pro Tem Phil Berger, R-Rockingham.</p><p>Pope insists that while the tax structure needs changing, a more balanced plan is needed. He even used the term "regressive" to describe the idea, and he's right. However, his boss, Gov. Pat McCrory, has indicated he may be more willing than Pope to go along with the idea.</p><p>Sales tax is paid on products or services bought and sold, without regard to how much someone makes. As a rule, those taxes take up a larger share of the income of low-wage earners than of those who are paid more.</p><p>The plan in question would replace the personal income, corporate and franchise taxes with a sales tax around 8 percent, a relatively modest increase in the tax rate that is now 6.75 percent in most counties. Together, the income taxes bring in about $12 billion annually – about 60 percent of the current state budget. But there's a catch: What is taxed also would be expanded to include a wide range of services that are currently not subject to sales tax – tree cutting and haircutting, heat pump repair and auto repair.</p><p>The result of the proposal would be to shift the tax burden more toward the bottom of the income bracket. An analysis by the liberal Budget & Tax Center projected that the wealthiest 20 percent of North Carolinians would get a hefty tax break while low- and middle-income residents would pay more.</p><p>And the increase would still leave a multibillion-dollar revenue hole. A proposed business license fee would narrow the gap, but it stands to reason, given the current political climate in Raleigh, that the proposal also could require dramatic cuts in state services including education and Medicaid.</p><p>A number of states, including Florida and Texas, have eliminated their state income tax. But in many cases that revenue is replaced with user fees or local taxes. That would be part of the strategy here. In addition to a higher and more broadly applied sales taxes, another idea being floated is a real estate transfer tax, which has strong opposition from the real estate industry and many homeowners. Exemptions that now help poorer residents reduce their tax burden also may disappear.</p><p>The Honorables may be able to make a case for lowering the income or corporate taxes, which are high compared to other Southeastern states, and raising the sales tax or applying it to services. </p><p>But if the General Assembly approves a complete overhaul – and a Washington Post article on Friday notes that this strategy is being played out in state legislatures across the country – then it must provide a reasonable tax break for low-income families and the elderly or disabled poor.</p><p>There are many possibilities for tax reform in North Carolina; this plan is but one of them, and should be considered a starting point. Whatever the final plan looks like, it should not be rushed. The Honorables have an obligation to consider the impact on residents, on job creation and on necessary state services. The plans must be discussed honestly, in open session, and public hearings across the state that include opponents as well as supporters should be part of the process – no midnight surprises or "Trust us, we'll fix that later."</p><p>Only after careful, critical analysis and a lot of debate should any major reforms take place. Anything less would violate the public trust.</p>